Accelerators

Just to be clear on the definition, this post is neither about setting up University Accelerator Programmes, wich I have written about extensively here, nor about Corporate Startup Incubators which I have written about in detail here. This post focusses merely on the classic stand-alone early stage Seed Accelerator as a business model such as Seedcamp, Startupbootcamp, Microsoft Ventures or 500 Startups (views are my own).

Introduction

Over the past years, Seed Accelerators have been mushrooming globally. Seed-DB, a public database for collecting information about Seed Accelerators which can be accessed here lists the most popular ones including the amount of investment, exits, the number of incubated startups, etc. The exact number of accelerator programmes globally is unknown, though. Figures range from 235 programmes listed on Seed-DB based on a list of strict criteria, to over 2,000 according to The Economist. Seed-DB figures show 5693 accelerated companies, 694 exits for $ 3,587,448,600 and $ 12,951,769,107 in seed funding. Despite the figures, there are different types of accelerators with different objectives. University Accelerators primarily do have an educational objective, corporate accelerators usually look to harness innovation at low-risk in line with the corporate business model(s), whereas Seed Accelerators have a primary mandate of returning dollars on investment.
My view is that Seed Accelerators are nothing more than investment vehicles with taking a bit more control on the return on investment by way of controlling the quality of the incubation process and leveraging the media attention to attract outside investors plus the populous in order to boost traction of their incubated startups. Whether that view is accurate or not, I leave that for public debate in the comment section below. Happy to respond as much as possible. The fact of the matter is, if you don’t start a Seed Accelerator to make money, you’re doing it wrong! And here’s how to do it:

Who should run a Seed Accelerator?

Similar to a startup, I suggest using people with extensive experience in the startup space. Ideally, a team of experienced founders that have started startups before as they are the best to validate and select founders for the cohort. They also bring the right level of credibility. In addition to that, as having a large ecosystem is vital for every Seed Accelerator, business networking, ecosystem development, and strategic business development skills are key for the management team. Alongside aforementioned skills, an outgoing personality and a front-man attitude should be one of the primary criteria when hiring a CEO. Corporate project managers, six-sigma jockeys, back office administrators, and other rather process-oriented trained folks are not Seed Accelerator material as you need hands-on, experienced entrepreneurs that understand what it’s like to start, grow and navigate a company.

What’s in for the startups?

Different Seed Accelerator provide different packages. Whilst I was mentoring the first batch of Startupbootcamp FinTech in London in early 2014, they built a large mentor network comprising practitioners with a background in financial services, banking, FinTech entrepreneurship and angel investing. The mentors with a corporate job were potentially able to provide access to their organisation. They also ran quite a few workshops on business model development using the infamous business model canvas by Steve Blank. If you closely look at what entrepreneurs need at this stage, Seed Accelerators can develop quite an attractive package by addressing those needs. In 2013, I was running SEO workshops as a mentor at Oxygen Accelerator on Google Campus London which enjoyed great popularity. Alongside free desk space, a community, parties and free Red Bull, skills, partners services such as free cloud space, usually provided by RackSpace, Amazon or BizSpark, are also attractive perks. Essentially, every startup will graduate from the programme which usually cumulates in a final demo day to which angel investors and representatives of media outlets are being invited to. This will ensure as much exposure and PR as possible. Oxygen Accelerator also provide public speaking training. I remember vividly there was a pair of two shy PhDs who were literally hiding under the table at the beginning of the programme. A very hands-on public speaking trainer transformed them during the programme, and made them performing like rock stars during the demo day in January 2014 in front of 300 people – amazing!
All in all Seed Accelerators need to be a safety net, offer a theoretical framework, skills, a community, and provide a safe home for early stage businesses as they’re very vulnerable taking their first steps into the world of business.

The mentors

One of the most important elements of Seed Accelerators is the mentor base. These are experienced individuals that provide support, expertise, and also, act as a sounding board which is particularly valuable to first-time entrepreneurs. Therefore, it is paramount for the Seed Accelerator not only to provide workshops and training to the startups but also to the mentors. At the Entrepreneurship Summer School of London Business School, where I also mentor, Prof Jeff Skinner, the director of the programme, holds briefing sessions with the mentors before introducing the mentors to its MBA students. He also handpicks mentors and assigns them on personal preferences and mutual fit basis in terms of business model, background, and network. A carefully vetted mentor base, mentor training sessions, specific mentoring experience plus a matchmaking process should be part of the package. Mentors and startups need to understand each other’s challenges and find ways to leverage everyone’s strengths. Otherwise, some corporate employees end up meandering around the accelerator staring at startups like in a zoo as Markus Gnirck, Co-founder Startupbootcamp FinTech, has pointed out in his infamous post Welcome to the FinTech Zoo. In order to avoid disappointment, one need to define and manage expectations for mentors and startups alike. Having fancy names on the accelerator website may jack up the numbers of applicants but that’s about it. Mentors need to be actively involved in the incubation process in order to add actual value to the equation.

How long should the accelerator programme be?

Most Seed Accelerator programmes run for three months. Depending on the stage of the startup, I think this is about right for revenue positive startups. One example is Microsoft Ventures Accelerator in London, where I also mentor startups with a cloud-based business model. Against the odds, but for a good reason, they don’t take equity but also don’t provide cash. Instead, their 16-week programme offers a range of perks such as technical mentorship from Microsoft’s technical evangelists and developers. Not offering cash allows them to source more mature startups which have largely worked out their product-market fit.
Conversely, a pre-incubation programme for idea-stage startups needs to run much longer that the regular three months in order to meet the needs of early stage startups. Benno Groosman, currently Entrepreneur in Residence at Orange Grove Athens formerly founded the LaunchBase pre-incubation at Maastricht University which ran for five months. During this phase, full-time students were able to fully develop their business model including verticals, route-to-market, revenue streams, test and validate their business assumptions through rigorous focus-group testing and data analysis. Some programmes can also be much shorter but that is down to what extend the accelerator is looking to provide and what is required by the startups at the same time. At some point, however, startups need to spread its wings, therefore being part of an accelerator for too long may be detrimental to the business success of a startup.

How about the equity bite size?

Most Seed Accelerators are in the 6-12% range in return for $15k – $25k of cash. Depending on the business model of the Seed Accelerator, whether the exit is planned at series A stage or later, and the risk profile of the portfolio, Accelerators usually exit after 2-4 years. Yet, the economics around Accelerators might not be crystal clear in all cases. Firstly, it’s not obvious that one can make a lot of money in the short term by running an Accelerator as it comes with high upfront costs. Think overheads such as rent for a large space which usually needs to be located centrally to be attractive, staff overheads, branding, marketing and PR expenses, as well as the actual seed investment.
At this point, an Accelerator needs to set and meet clear targets on management level, at the portfolio level, and at the programme level. Also, the incubated startups need to meet targets and objectives too. In short, a Seed Accelerator needs a business plan, a revenue model including targets and smart people that can execute the heck out of it.

Which vertical?

When Seed Accelerator started out, they were fairly broadly targeted. Seedcamp, launched in 2007 by a group of 30 European investors, shoots at everything that moves. Over the past years, the market has become highly diversified, however. Kitchenette in London has a sharp focus on food for example. London alone has over 60 accelerator programmes of all sorts. A great example of the global diversification is reflected in Startupbootcamp‘s range of 13+ specific programmes ranging from FinTec and InsurTech in London to Smart Transportation & Energy in Berlin, IoT & Smart Data in Barcelona to Digital Health in Miami just to name a few. Depending on the investor’s focus, the mentor’s expertise and also the target market of the startups, the vertical needs to be agreed on long before the fund starts raising.
After having defined the actual exit strategy of the Seed Accelerator and at what point the investors intend to cash in, one need to back engineer the entire ecosystem including value chain, PR/media, mentor base, startups, skill programme, conversion funnel and application process. A laser sharp specialisation in line with the ultimate accelerator portfolio exit goal on all levels and at all stages of the incubation process is key.

What is the perfect portfolio size?

In all honesty, there is no perfect answer to the question. While 500 Startups, founded by Dave McClure, banks on cohorts of 50 each intake based on the believe that one out of 50 will become the next unicorn, other Seed Accelerators are way more modest. Obviously, the bigger the cohort the larger the ecosystem needs to be. If you go small, you can work more closely with each startup and accelerate much faster. If you go for volume, the chance that a dark horse or a unicorn breaks out is much bigger but time commitment for each startup drops. At the end of the day, however, it’s all about quality which should not be compromised for quantity to fill quotas. I would suggest starting small and high quality. Once the first cohort has received follow-up funding and thrives, reputation and application numbers will increase and thereby it will become easier to spot the diamonds.

Who will provide the follow-up investment?

On the investor side, a careful selection process is also required. Dump money doesn’t go far but smart money with connections, experience and door-openers accelerates and appreciates. As mentioned above, a strong ecosystem is vital for every Seed Accelerator. In the same way, one should vet the mentor base, the angel investor and venture capital base need to be vetted too. Events geared towards investors, dine-and-wine evenings and personal introductions are key. Professional networking and targeted matchmaking between startups and investors are key elements when it comes to spoon-feeding the local investor community. At this point, we’re talking business. The more portfolio companies are being invested in post graduation, the faster the startup portfolio appreciates in value. The quicker cash is being injected, the quicker startups grow and the quicker the investors behind the accelerator can exit.

Seed Accelerator business models cannot be copied into any market. Each Seed Accelerator has its own focus, sits in a different local ecosystem and is made up of a large number different people. Cultural diversity, location, industry and investment objectives of the investors can differ greatly. Having said that, an excellent Seed Accelerator needs to be engineered all along the value chain, from talent, branding, marketing, startups, mentors, investors, management team to the acquirers. If the Seed Accelerator hasn’t built that value chain or if one component has been neglected, it impacts all other elements. A Seed Accelerator is a complex undertaking. After all, it labours under the assumption that by way of applying a certain level of quality control of all aforementioned elements one can mitigate the risk that comes with venture capital investment activities and drives better investment returns as a result.

However, this doesn’t take general market conditions, the receptivity of third parties, unforeseen opportunities that might arise in the process or any other unforeseen world/market events into account. At the end of the day, a Seed Accelerator is just another venture capital investment vehicle that faces the same level of uncertainty as the startups in its portfolio.